Some companies take a Field of Dreams approach, hoping that if they build, customers will respond. That's not the case with most energy infrastructure companies. They refuse to put shovels into the ground unless they've already received significant customer support in the form of long-term, take-or-pay contracts that guarantee a steady stream of cash flow as soon as an asset enters service.
While those customer commitments were hard to come by over the past few years due to the turbulence in the oil market, energy companies are beginning to grow more optimistic about the future. Because of that, Phillips 66 Partners (PSXP) and several other partners were able to secure the necessary commitments to move forward with the Gray Oak Pipeline, which will transport oil out of the fast-growing Permian Basin. That project will enable these companies to generate more income, likely allowing them to boost their already above-average payouts.
Drilling down into Grey Oak
Refining giant Phillips 66 (PSX -0.94%) and Canadian energy infrastructure behemoth Enbridge (ENB -3.62%) initially pitched Gray Oak to oil shippers in early December. At the time, they envisioned a 385,000 barrel-a-day pipeline that would move crude from several connection points in West Texas to refineries and export docks along the Texas coast starting in the second half of 2019.
The project has evolved since then. Phillips 66 is no longer a direct investor in the pipeline, choosing instead to have its master limited partnership (MLP) Phillips 66 Partners take the lead. The MLP will hold a 75% interest in the joint venture (JV) building the project. Enbridge, likewise, won't initially invest in the project but instead is one of the third parties that has the option to acquire up to a 32.75% interest from Phillips 66 Partners. Joining Phillips 66 Partners will be refiner Andeavor (ANDV), which will own a 25% interest in the JV.
Not only has the ownership structure changed, but so has the scope of the project. Phillips 66 Partners now envisions a 700,000 barrel per day oil pipeline, which could ultimately move up to 1 million barrels per day if they secure additional contracts with shippers. Further, the pipeline will transport oil not just from producers in the Permian but also from the Eagle Ford Shale in South Texas.
On top of building this pipeline, Phillips 66 Partners and Andeavor have teamed up with Buckeye Partners (BPL) to construct a new marine terminal in Corpus Christi, Texas. Buckeye will operate the South Texas Gateway Terminal and own a 50% stake in the JV while Phillips 66 Partners and Andeavor will split the remaining 50% interest. Both projects should enter service by the end of 2019.
What this project means to income investors
In addition to providing greater market access to producers in Texas, these projects will deliver larger income streams to the companies developing them. Phillips 66 Partners will be one of the biggest beneficiaries given its large stake in Grey Oak and its interest in the new Buckeye terminal. The company is currently in the midst of a five-year strategy to increase its distribution to investors at a 30% compound annual growth rate. While that current plan ends this year, these new projects, plus a $200 million expansion it's undertaking at one of Phillips 66's refineries, should give it the fuel to continue increasing its 5.6%-yielding distribution at a healthy pace well past its current outlook.
Andeavor's dividend will also likely benefit from these projects since they should give it the fuel to increase its 2%-yielding payout. Though, it wouldn't be a surprise to see the refiner eventually drop down its stakes in these assets to its MLP, Andeavor Logistics (ANDX). That sale would help Andeavor Logistics keep up its incredible performance where it has increased its payout for 28 straight quarters and improve upon a distribution that already yields an attractive 8.5%.
Buckeye Partners, meanwhile, has an even higher yield of 12.6%. While a payout in the double-digits is often a sign of trouble, Buckeye currently has no plans to reduce its distribution. Instead, the company expects to maintain the current rate and allow its increasing cash flow to improve its weaker financial metrics. As those numbers strengthen, and the new terminal comes online, Buckeye could resume distribution growth.
Topping off the tank
By securing contracts for these new expansion projects, Phillips 66 Partners, Andeavor, and Buckeye Partners should enjoy a nice increase in cash flow when they come online at the end of next year. That boost could allow all three companies to increase their already above average payouts, which is great news for income investors.